Here's an industrial policy that could get Europe moving again

European industry is in crisis; production is 10% lower since the economic crisis began in Europe and over three million industrial jobs have been lost. But real actions, as distinct from declarations and reports on the need to re-industrialise Europe, are still missing. The question is how to cope with global competition and creative destruction with all their positive and negative implications and how the EU and member states will act on the issue to boost European industrial competitiveness.

The problems that confront many industrial sectors in Europe do not result from the financial and eurozone crisis. On the contrary, the crisis is arguably the result of the unilateral energy, climate and environmental policies which are hurting European industrial competitiveness, the lack of structural changes in national economies, and also the delayed responses of many European actors to the information revolution. Digitalisation and the de-centralisation of industrial value chains have often not been adequately addressed.

Production processes are divided into tiny sequences, so whether we’re talking of heavy industrial products like turbines or consumer goods like home appliances, they are nowadays designed, manufactured, marketed and sold in many different locations. For successful multinational companies, this is business-as-usual; but for more domestic SMEs it has often been a destructive process.

Specialised production tasks can be located in regions that have a comparative advantage in terms of regulations, skills, lower costs and the availability of labour. Just as important, industrial companies tend to want to establish a physical presence in markets where they are growing their market share. The logic we have to accept is that in the global context Europe is no longer an attractive region.

Structural changes affecting various industrial sectors are also weakening Europe’s position, and a good example of this is the rise of ICT and the Internet. It’s not only the pulp and paper industry that is suffering from the dramatic fall in demand for printed media – Europe as a whole is losing the battle for “digital euros” to Asian and American high-tech giants like Samsung, Apple, Google and Amazon.

The EU has in addition arguably committed itself to unilateral energy, climate and environmental policies that are hurting its industrial competitiveness. Europe cannot reverse climate change by itself, or choose an energy policy which isolates it from external shocks such as the shale gas revolution. It is right to devise policies that create incentives for private investments into renewable energy and clean technologies, but energy and climate policy need to take into account the globalised world we live in.

The transformation of Europe’s economies to post-industrial service economies began decades ago, so losing production to regions outside the EU is far from a new phenomenon. It took place because the comparative advantages for mass production are now to be found elsewhere. In the EU, manufacturing’s total share of GDP has been declining steadily and now stands at 15.5%, with the drop more dramatic still in the Nordic countries, and the current economic crisis is accelerating this decline.

But this does not mean that Europe’s national economies don’t have new opportunities. Recent studies suggest that what is even more important for national economies is the location of the “immaterial capital” that drives industrial production – the R&D, design, marketing and other services. Why then do we have to worry about industrial production moving outside Europe, when we could instead concentrate on activities that bring greater value?

There is a misconception about industry’s role in national economies. We have to worry, because evidence is that industrial production plays a key role in business services, R&D and, most important of all, in stimulating exports. Four-fifths of the EU’s trade consists of industrial exports, while four-fifths of Europe’s private R&D investment is from the manufacturing sector. So there is a clear cause and effect relationship between jobs and growth and industrial production. The European Commission has estimated that for every hundred jobs created in industry, at least 60 and perhaps 200 new jobs were created in the rest of the economy. In Germany, a third of the sales turnovers of industrial companies are products that are not purely industrial.

The European Commission and others have produced many policy guidelines to improve our competitiveness. The Commission has highlighted the need to reverse the declining role of industry in Europe; if its contribution can be returned to the level of 20% of GDP by 2020, an estimated 400,000 new jobs could be created every year. But the EU Commission doesn’t have the tools it needs, and those it does have tended, in the view of many industrialists, to be used controversially. A vital element for renewal is research and innovation, yet less than 10% of the EU budget – €70bn out of around €1 trillion – is targeted for this. EU regulations also hinder rather than enhance industrial growth, notably in areas like finance, energy and environmental policy. Among Europe’s missed opportunities there is the poor execution of the EU’s Digital Agenda and the lack of a genuine single market in many industrial sectors in Europe.

Besides tackling competitiveness, much greater emphasis has to be put on the renewal of manufacturing industries. Germany is securing the future of manufacturing with its ‘Industrie 4.0’ public-private initiative for transforming its engineering strengths into so-called cyber-physical-systems that can enhance production processes. U.S. measures to combat de-industrialisation include its ‘Advanced Manufacturing Partnerships’. And China plans to invest €1.2 trillion between 2011 and 2015 in the development of strategic emerging industries. Greater political will and the investment of hard cash is clearly needed in EU member states to match worldwide competition.

Regaining economic growth in Europe means improving the cost-competitiveness of our companies, renewing the industrial base and increasing manufacturing’s share of total output. Our target should be to ensure that by 2020 Europe is the most attractive region in the world for business and investment. The re-industrialisation effort needed should therefore address the following issues:

• Cutting the regulatory burden on industrial production. Industry and policymakers need to agree on pro-growth and pro-industry regulations that allow the market-led development of new technologies. No increases in energy costs, or moves that isolate Europe from the global energy system, should be made within the EU.
• Developing successful new products and services. Public investment in R&D, both nationally and at EU level, needs to be directed towards areas with the highest economic risks and the greatest potential for creating new jobs. That means ensuring the EU’s Horizon 2020 innovation programme, together with related public-private partnerships, is used to the fullest.
• Creating smarter and greener solutions to manufacturing and distribution problems. Europe must invest more quickly in advanced and ICT-driven industrial production if it is to match competition from China and the U.S. We need cleaner and leaner production processes and logistics.
• Attracting more investment to Europe. Europe needs to implement a free trade agenda that is more ambitious than ever, and at the same time promote foreign direct investment strategies that will attract new production and R&D operations to Europe. The financing of this new inward investment should be enhanced by Europe’s own financial market and by more versatile corporate financing.

The re-industrialisation of Europe will not be achieved through old-style industrial policies which tried to create state-led industries through the use of subsidies. Nor will it be assisted by protectionism of any kind, whether on a regional, national or EU level. Fundamental change must be embraced and not hindered, and that’s where the right kind of industrial policies have an important role to play.